What Is The Cross Elasticity Of Demand

a. At $40, Q = 840 - 0.50(40) = 820. The quantity demanded is 820 when the price is $40.

At $38, Q = 840 – 0.50(38) = 821.The quantity demanded is 821 when the price is $38.

According to the market demand equation, a $2 decrease in price would cause the quantity of jeans sold to increase by 1. Therefore, consumer expenditure rises with the decrease in price.

b. Elasticity = % Δ Quantity ÷ % Δ Price = (820-821)*100 ÷ (40-38)*100 = -100 ÷ 200 = -0.5.

The elasticity, in absolute terms, is 0.5 making it a relative inelasticity of demand. Since it is inelastic, total revenue would decrease as the price decreases.

2.

a) Cross elasticity = (Q2a – Q1a) ÷ (P2b – P1b) = (13,000 – 23,000) ÷ (15 – 12) = (Q2a + Q1a)/2 (P2b

This shows that the two companies’ sports cars are strong substitutes for each other as more people purchased the cheaper one. By decreasing the price $3, Walmart was able to take 10,000 sales from Toys R Us. If it was a poor substitute, this price change would not have had such a large impact on the quantity sold.

b) Price elasticity = (Q2 – Q1) ÷ (P2 – P1) = (25,000 - 15,000) ÷ (15 – 1 2) = 10,000 ÷ 3 = (Q2 + Q1)/2 (P2 + P1)/2 (25,000+15,000)/2 (15+12)/2 20,000 13.5

=2.25

Walmart’s sports car toys price elasticity is 2.25. This shows that it is elastic as a change in price causes a change in quantity demanded that is greater than one percent. As the price decreases, total revenue is expected to increase. This is so because the demand curve slopes downward which means a decrease in price leads to increase quantity purchased and increased receipts. Since the change in quantity was greater than the change in price, the quantity has a stronger effect and will be able to offset the price effect.

3.

a. The equations for MP and AP are as follows:

Marginal product of X = MPx = ΔQ / ΔX, holding Y constant

Average product of X = APx = Q / X, holding Y

When Office Max raises its price to $36, Q = 10,000 + 60B – 100P + 50C =

10,000 + 60(160) – 100(40) + 50(36) = 10,000 + 9,760 – 40000 + 1800 = 17,560

When Office Max raises its price to $36, HON office furniture can predict to sell 17,560 cabinets annually.

c. When P = $37, Q = 10,000 + 60B – 100P + 50C = 10,000 + 60(160) – 100(37) + 50(32) = 10,000 + 9,760 – 3700 + 1600 = 17,660

If HON lowers its price to $37 in reaction to the competitors price being $32, HON can expect to raise its total number of cabinets sold by 300 cabinets.

d. When B = 140, Q = 10,000 + 60B – 100P + 50C = 10,000 + 60(140) – 100(37) + 50(32) = 10,000 + 8,400 – 3700 + 1600 = 16,300

If the index forecast is only 140, the annual number of cabinets sold is forecasted to be 16,300.

5. (a) Technological changes affect rivalry among existing competitors by allowing competitors to use their resources to the fullest. Technology provides an easier way for competitors to enter new markets and advertise to a large group of people. Consumers are interested in the newest and greatest object, so the company that is the most technologically sophisticated will attract more consumers and thus create rivalry among competitors. Technological advances can also decrease the cost of production for a company allowing them to lower the price to the consumer and still make